Monday, February 29, 2016

Monday Forum - corporatisation

The financial problems experienced by listed Australian law firm Slater and Gordon since its expensive and now disastrous acquisition of UK firm Quindell has received extensive media coverage. These are a few examples: here, here, here, here.

I wrote a fair bit about corporatisation in professional services back in the 2000s. For example, this is a piece I wrote in May 2007: Corporatisation, Corporate Structures and the Law - The Case For. Later in that month, I wrote:
At one level, a simple move from a partnership to an incorporated body changes nothing. Partnerships already face a variety of challenges, including the need to make sufficient profit to pay partners and fund development in a competitive marketplace. Wrapping a corporate envelope around the partnership does not change this. 
The position changes, however, if the firm actually lists in the way Slater and Gordon did because two new factors come into play. 
The first is the need to formally consider the needs of shareholders as owners. In theory at least, a partnership may decide to sacrifice profits in the interests of its clients. Again in theory, this is more difficult in a listed corporation because of the direct pressures to provide shareholder returns. 
I say in theory in both cases because I am not sure how much difference there is in practice. Indeed, in partnerships the need to maximise partner cash flow creates pressures that may be just as, if not more, detrimental to clients than the shareholder return requirement. Here a feature of the ethical discussion has been a comparison between corporate operations and the independent professional model, whereas the comparison should be with the partnership model. 
The second linked factor is more complicated, the temptation to play corporate games in an attempt to maximise the the share price and to please the market . In my view this is a real danger that can, as we have seen in other areas, threaten the very existence of the firm itself.
I don't have time tonight to tease out the issues, so instead pose two questions: can corporatisation work?; if, so in what circumstances? As always, feel free to go in whatever direction you want! 


16 comments:

Anonymous said...

Of course corporatisation 'can work'. The ASX is proof of this every day - for good and bad. The significant difference attaching to incorporation (of publicly traded companies) is the removal from available assets (when things go belly up) of those personal to the individual entrepreneurs - but that is true of any business undertaking larger than a $2 company shell.

SG's problems are a combination of unfortunate decision making and most probably inadequate financial oversight by its lenders - but that can happen with any form of legal structure. Your quite reasonable listing of potential hazards is not limited (neither is it heightened) in any significant way simply because you are talking of law firms, or of any other of 'the professions'.

So, my answers are 'yes', and 'well managed'.

kvd

Jim Belshaw said...

Fair points, kvd. I had in mind in particular the transformation of one form - a partnership, a mutual, a government agency - to another form. I am now questioning the claimed benefits expected to flow from that transformation.

Anonymous said...

And now it's sooper choosday! Can the unrepentant socialist beat out the lying liar who lies; and can anyone put a dent in the world's largest orange-hued fencing contractor? Can't wait for the final showdown between the woman (because, vagina) and the angry mango!

Speaking of fences, methinks Canada should commence construction asap :)

kvd

Jim Belshaw said...

The success of DT really took me by surprise There is a very funny video on the Canada fence idea. Sadly, I din't recrd the link and cannot find it again!

Anonymous said...

On glaciers, who knew?

A critical but overlooked aspect of the human dimensions of glaciers and global change research is the relationship between gender and glaciers. While there has been relatively little research on gender and global environmental change in general (Moosa and Tuana, 2014; Arora-Jonsson, 2011), there is even less from a feminist perspective that focuses on gender (understood here not as a male/female binary, but as a range of personal and social possibilities) and also on power, justice, inequality, and knowledge production in the context of ice, glacier change, and glaciology

- http://phg.sagepub.com/content/early/2016/01/08/0309132515623368.long

kvd

Sue said...

Hi Jim

I just read an article by Chris Hedges (5 March 2016) on one of my favourite blogs: Three quarks daily.


I would be very interested in reading your views on this article. I also wonder what KVD would make of it ...


I'm still trying to sort out my thoughts.

Sue

Anonymous said...

Hi Sue. I read that article but I think I'll let Jim rise to your bait first :)

But a couple of things to throw into the pot: 1) fascism seems more achievable in an homogeneous society, which the US is not. Hard to see how the disparate immigrant/racial groups would all align as one. (This assumes the writer is not just throwing it out as an insult/epithet), and 2) I used to think it would be a Biden/Rubio matchup; now I think it will be Biden/Cruz - and to me Cruz is way more scary than Trump.

Be interested your own thoughts when you've sorted it out. And thanks for the invite.

kvd

Anonymous said...

Late to this, but I couldnt'really see corporatisation working for law firms. They're not built like that, not predicated around the same ideal.

LE

2 tanners said...

Law firms should be built around partnerships and the reason can be summed up in four words: Joint and several responsibility. I assume you can't escape the ethical responsibilities of running a law firm by pleading responsibility to the shareholders and therefore , as LE says, a corporatised law firm doesn't work. It's a conflict of interest waiting to happen.

Anonymous said...

It is rare I disagree with LE (less rare with tanners, but here we go again :). The thing to remember is that incorporation is not suited to all firms - size being one major factor - and I don't think Jim was suggesting it as appropriate industry-wide.

The joint and several 'disability' of a partnership structure is perfectly suited to small to small-medium law firms who mostly deal with small-medium clients; but it is very hard to scale that up to multi-office 100+ partnerships which are all too common these days. I just think it's a nice conceit, and I say that as a long-retired Chartered Accountant who was in a partnership for some years. And I also say that after over 20 years of intimate business relationships with law firms both small and very large - including national.

The idealistic "my word is my James and also that of my partners' " is an anachronism, and any lawyer who enters into such partnership without adequately protecting his personal estate is no lawyer I'd wish acting for me. Please don't take this as a criticism - more just facing reality.

Looking at the NSW regs, it seems to me there is no lessening of joint and several responsibilities for ethical practice; and that bad people will still always be bad; and that bad/incompetent people will always be in a tiny minority, and it is the very essence of good business that you not place your personal reputation at risk, no matter what business structure you adopt.

kvd

2 tanners said...

kvd,

You and LE are more experienced than me in this area. I guess my point was that if some/any/all of you are *ethically* required to do things for your client(s) that might hit your bottom line, it's more comfortable in a partnership structure where you don't also have a legal responsibility to maximise shareholder returns. I have only worked in very limited partnership structures where the partnership was precisely that.

If I'm wrong, I'm wrong and will atypically raise the white flag.

Anonymous said...

I take 2tanners' point. That's certainly what I was taught at law school, actually, partnership is good for lawyers because if one partner is a bad apple, the others have to pick up the cheque for his or her misdeeds. Thus it is thought to provide an incentive to self-police (although whether it really does is another question...)

But for me, it's as much about the way law firms run as anything else. Corporatisation may work, but only if law firms change the way that they presently think.

Actually the way I feel about law firms is that the partners cream off the profit from the grunt work of juniors whom they burn out (me bitter, much?), so a change to mentality would be welcome.

I guess the thing that concerns me with corporatisation is this: it will increase the obsession with profit and the bottom line even more. I'm not saying profit isn't important (everyone has to make a living) but I feel that with billable hours and the like, firms have really lost sight of what they are doing.

So the focus of the firms at which I worked, and at which my friends have worked, was "what were your billings?" not "have you satisfied the client and done an efficient job?" I found this bizarre and totally at odds with my own ideas. If the focus continues on maximising billings - I fear the situation will be made worse by corporatisation because of shareholder demands. But if corporatisation means a move away from this short-sighted approach, it might be a good thing. Sadly, I'm a cynic.

LE

Anonymous said...

I'm trying to remember a highly successful law firm which didn't satisfy their clients or do the work efficiently. Thinks...

Nope :)

kvd

Anonymous said...

IMO, there's plenty of lawyers and law firms that don't do good work, and still get clients! The reason is because often clients aren't a particularly good judge of whether the work has been done efficiently or even whether it's well done at all. I've opposed some *shocking* firms...terrible...

LE

Anonymous said...

Yes LE - I do agree with you. I was only playfully prodding at your earlier comment - hence the ':)'

While the discussion has roamed about a bit, I don't think for instance that corporatisation leads to a removal/reduction of ethics from the business equation, and (from tanners comment) I don't regard ethical business practice as a 'cost' to business profitability - 'the bottom line' as he called it.

Maybe it depends upon your definition of what success is - particularly as to the time scale? Many firms in many industries make a motza in the short term by unethical trading, but few last beyond a scandal or two - so where's the overall 'success' in that?

kvd

Anonymous said...

LOL, missed the :-)

I think a lot of firms rely on the fact that people don't know how to judge the quality of the legal services they are getting. And lawyers wonder why people hate them?

It just seems terribly short-term to me. I recall a case in which one firm came totally undone on the basis of bad billing practices - Keddies, if I recall correctly.

LE